EPL claims - Hidden holiday pay: The EAT decides overtime should be included in holiday pay - DAC Beachcroft

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EPL claims - Hidden holiday pay: The EAT decides overtime should be included in holiday pay

Published On: 12 November 2014

This morning the Employment Appeal Tribunal published its long awaited decision in the Bear Scotland Ltd v Fulton (and other conjoined) cases.

Attracting national press coverage, all the cases concerned the question of whether an employer should take payments in respect of workers' overtime into account when calculating statutory holiday pay. The EAT also looked at the similar question of whether some allowances (such as higher rates for stand by and emergency call out) should also be included in the calculation. The potential exposure to employers in respect of claims for backdated holiday pay was in the £millions, as well as the risk of ongoing costs to employers to meet the need for increased holiday payments.

The EAT decided:

  • Overtime should be taken into account when calculating holiday pay;
  • Workers should be paid their "normal remuneration" during the holiday to which they are entitled under EU law, i.e. 4 weeks. This will mean average pay, rather than just basic hours' pay which has long been understood to be the entitlement of workers with normal hours of work;
  • However, the employers' appeals succeeded in some respects when dealing with the issue of whether employees can make claims going back a number of years. The EAT concluded that where there is a break of more than 3 months between any holiday pay claims, an Employment Tribunal will not have jurisdiction to hear the earlier claims. This may severely restrict the ability of workers to bring valuable, retrospective claims for underpaid holiday pay.

EPL claims - what does this mean?

Whilst employers may have lost this round in part, this is unlikely to be the end of the story as the case is likely to be appealed to the Court of Appeal and perhaps beyond. There is also some positive news for both insurers and insureds at this stage, relating to backdated holiday claims, which was one of the main concerns. If an employer has not yet had a demand for holiday pay from its employees or unions, it can expect to get one now. Those who have not assessed their risks/potential liability should do so now. We can assist in this process.

In respect of EPL policies, holiday pay itself may be excluded from the definition of loss as "employee remuneration" (or similar) is typically excluded. However, defence costs may be covered and given estimates are that 5 million workers in the UK receive overtime, a significant number of claims for unpaid holiday pay could be brought within a short space of time.

Within our Employment and Pensions Group, we have a bespoke EPL team, comprising of solicitors and claims handlers across the UK who handle a large volume of EPL claims every year and have a wealth of knowledge in working with insurers, insureds and brokers on such claims.


Calculating the correct amount of holiday pay owed to an employee under the WTR has historically proven to be a tricky task for employers. Under the European Working Time Directive, workers are entitled to four weeks holiday pay a year, but the Directive does not give details on how it should be calculated. In the UK, this right was implemented via the Working Time Regulations 1998 (WTR) which granted workers four weeks’ holiday per year (we refer to this as EU holiday). In 2009, UK workers were granted an additional 1.6 weeks’ statutory holiday per year under the WTR. Many employers also offer contractual holiday over and above these statutory entitlements.

The WTR state that workers should be paid a “week’s pay” for each week of statutory leave calculated in accordance with the Employment Rights Act 1996 (ERA). The ERA provisions have, to date, enabled employers to calculate holiday pay based on basic pay only, excluding other payments such as commission and overtime.

A 2011 case, Williams v British Airways shed some light on the situation. The European Court held the regulations should be interpreted in the spirit of European working time law and that workers should receive their "normal remuneration" when on holiday. It said holiday pay should be calculated with reference to both basic pay and any other pay “intrinsically linked” to the work, which could include overtime and other allowance.